Christmas rate cut chance heightens

The Reserve Bank has signalled another reduction in the cash rate next month or early next year. The minutes from the RBA's November meeting says the board considered a further easing might be appropriate in the period ahead. The RBA has cited mixed commodity prices, a softening labour market and a high Australian dollar as possible reasons for a cash rate cut

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ELEANOR HALL: The Reserve Bank board flagged today that it could cut Australia's official interest rate as soon as next month.

The anticipated reduction to 3 per cent would take the cash rate to its lowest level since April 2009.

The signal is contained in the minutes of the RBA's last meeting, which it released this morning.

Our business editor Peter Ryan is just back from the RBA headquarters at Sydney's Martin Place and he joins us now.

Peter, the Reserve board decided not to cut rates when it last met. What are you seeing in the minutes from that meeting that suggest there could be a pre-Christmas rate cut?

PETER RYAN: Well Eleanor, I saw some pretty key comments as I read the document from the final paragraph backwards, which is the way we always the best comments, and I saw that, quote, "as members considered that further easing may be appropriate in the period ahead".

There's not much of a period left when you consider there's one more meeting left this year. The minutes also talked about mixed commodity prices, a softening labour market, slowing household consumption, a high Australian dollar, surveys showing that business conditions are below their long term average.

The RBA also pointed to the mining slow down with, quote, "considerable uncertainty about the timing of spending for mining investments projects given their size and complexity". So when you consider all of that, you would have to say that the possibility of a pre-Christmas rate cut is firming up, if not for the first meeting of 2013 in February.

ELEANOR HALL: When you consider all those factors in favour of a rate cut, what was there that made the Reserve Bank decide not to cut rates a fortnight ago?

PETER RYAN: Well as you'll recall from last month, something like 20 out of 28 economists polled by the Bloomberg wire service had tipped a rate cut. They were left red faced when the Reserve Bank decided to stay on the sidelines at 3.25 per cent.

The board, the minutes noted today that the board decided that with inflation for the September quarter slightly higher - and keep in mind that the RBA is all about keeping inflation between 2 and 3 per cent - but also positive news about the global economy, they believe that the stance of monetary policy was appropriate for the time being.

The minutes also note the RBA's pretty cautious considering that the cash rate has fallen by 1.5 percentage points since November last year and the minutes also show that the RBA thinks that more time is needed to see what's happening with those rate cuts as they work their way through the economy.

And so they believe that there's a bit more time to see whether those changes will be observed or something tangible on the impact.

ELEANOR HALL: And Peter, do these minutes give much of an indication of what the RBA board members think about the global situation?

PETER RYAN: They're still very worried about what's going on in the world, Eleanor, and they've indicated though that the decision to keep rates steady a fortnight ago was driven by greater optimism, that the world is perhaps back from the brink of a new economic downturn.

When we were talking this time last year it looked as though Europe was heading towards a meltdown that would have big impacts on the world.

It believes that Europe is still weak but not as bad as it was a few months ago. The minutes cite a stabilisation of the Chinese economy, moderate growth in the United States. It does mention the dreaded fiscal cliff in the United States, that's the budget impasse between president Obama and congressional Republicans over budget cuts and tax increases.

It believes that there could be a more positive resolution and better growth prospects, but indeed still very concerned about the world but perhaps not so much about the United States and the fiscal cliff, but Europe is the big concern.

ELEANOR HALL: And closer to home, did the carbon tax come up at all?

PETER RYAN: It was interesting - the carbon tax has been mentioned in RBA minutes and quarterly statements since July. This time the minutes say the carbon price has had a noticeable effect on electricity and gas prices, would boost headline inflation by 0.7 of a percentage point.

The RBA believes that the combined impact of the carbon price and volatility in fruit and vegetable prices could see headline inflation rise above 3 per cent next year.

But it did note that healthcare costs are rising as well, given that the eligibility for the private healthcare rebate has been tightened, and that has been having an inflationary impact on households.

ELEANOR HALL: Now any reaction from the Australian dollar to the RBA's latest comments?

PETER RYAN: The Australian dollar was about 104.24 US cents a few minutes before the news hit the market. It fell about a quarter of a per cent, perhaps anticipating a rate cut next month. But a short time ago, the dollar was back above 104 US cents, the dollar still remains high as the RBA has noted.

So perhaps a sign that a rate cut next month is not necessarily a sure thing, we'll find out soon.